What is a Land Contract in Wisconsin?
Unlike most real estate transactions, where a buyer makes a down payment and pays a mortgage to the bank, in a land contract sale, the seller finances the property for the buyer. The seller retains legal title (called bare legal title) while the buyer has equitable title and a possessory interest.
A land contract is a written agreement where the buyer and seller agree that the buyer will pay for the property over time with regular payments that include principal and interest at a set interest rate. The land contract receipt shows the total purchase price, amount of down payment, and depicts the payment schedule for the term of the land contract.
The seller agrees to give the deed to the buyer once the buyer has paid all payments to the seller and has made any prerequisite improvements to the building. This is a way to protect both the seller and the buyer. The buyer gets financing for the purchase of the property without going to a traditional lender, and the seller knows he is getting paid before he gives the deed to the property.
If the buyer doesn’t pay on the land contract, the seller can take the house back through a court-ordered strict foreclosure in which the buyer is evicted from the property via court order. The seller owes the remaining balance on the purchase price once the sale goes through.
This is legally different from other foreclosure situations. Under a traditional mortgage foreclosure, the bank must satisfy the mortgage as a first mortgage , so any other mortgages against the house would be an impediment to the bank. Under a land contract, the seller has superior rights to the property until all payments are made, so other mortgages have no bearing on the arrangement.
For example, if the buyer fails to make payments on a $200,000 land contract and the seller forecloses on the land contract, the buyer loses the property and owes the seller $80,000 because that’s how much he paid so far. However, if the buyer had financed a mortgage separately with a bank, the bank now has a claim for the entire $200,000.
In contrast, under a traditional mortgage, if the bank were to foreclose on its mortgage and sell the house, the bank gets paid first and the seller has to wait for the bank to be paid off before collecting. For the seller, a land contract may be a better deal because he gets to retain full ownership of the property until the sale is complete.
There are a few other terms used in land contracts worth noting:
COBRA stands for "Contract on the Buyer’s Rights and Assignment" and is a form creating an equitable mortgage via a recorded document. This allows the seller/buyer to sell his rights to another party. The lender/wife can then foreclose and take the house without having to go through the buyer to get to the party responsible for paying the mortgage.
ROBA stands for "Recordation of Buyer’s Assignment" and is a form giving the buyer a right to assign his duty to pay the mortgage to another party via a recorded document.
Essential Elements of a Wisconsin Land Contract
Every land contract in Wisconsin must have certain terms. The purchase price, down payment, installment payment amount, interest rate, and the length of the contract, are all essential components of the deal. For example, the land contract with a purchase price of $200,000.00, down payment of $10,000.00, two year payment plan at 10% interest with monthly payments of $9,000.00, is clearly a sale pursuant to a land contract. In real estate and business law, it is possible to draft a custom land contract that requires a down payment of $0.00, an interest rate of 25% per year, five weekly payments of $100,000.00 each, and a contract term of 1 week. As a general rule – the higher the interest rate, the shorter the loan period. For instance, signing a land contract to purchase a $200,000.00 home on the East Side of Milwaukee, January 1, 2014, with a 25% interest rate, a $200,000.00 down payment, and weekly payments of $125,000.00, for five weeks, would be completely void. Neither the buyer nor the seller could enforce their rights under the land contract, as it would be an illegal loan. Even if the land contract is valid without any term, (I’ll pay you later), the contract would likely be unenforceable. This is why you absolutely must know the components required to create a valid land contract. Generally, the most common components that constitute an illegal and unenforceable land contract include no down payment, fixed weekly periodic payments, and a term of approximately 7 days to 30 days, at an interest rate of approximately 25% to 40%. Under Wisconsin law, these terms likely violate the usury statute among others.
Legal Mandates & Responsibilities
A valid land contract in Wisconsin is subject to a number of legal requirements. These requirements address the contents of the land contract and the obligations of both the buyer and seller. The obligations and legal requirements are established primarily under Wisconsin Statutes Chapter 706, while also being impacted by Chapter 704. One of the most important legal formalities required by Chapter 706 is that any land contract for the sale of Wisconsin real estate must be in writing.
The land contract must generally follow all of the legal requirements of a deed, which include: (1) a legal description of the property and (2) the signature of the seller. The purchase price does not need to be included in the land contract.
Unlike a deed, the land contract does not need to be witnessed, notarized, or recorded. However, if these requirements are met, the land contract can be recorded with the Register of Deeds. Recording the land contract provides "constructive notice" (meaning all parties are considered to have knowledge of the provisions of the land contract) of the transaction to the world and gives the buyer the ability to obtain legal title.
While a land contract does not need to be registered with the Register of Deeds, the buyer must pay real estate taxes, assessments, and local or special expenditures. If the buyer fails to make these payments, the seller may pay the delinquent amount, with interest, and charge it to the purchaser. If the buyer does not reimburse the seller after 30 days, the seller has the right to treat the land contract as terminated after receivership of the property.
The seller is also responsible for paying the mortgage encumbering the property. The seller may also require the buyer to pay the mortgage amount in addition to the purchase price.
The buyer is required to maintain the property, including maintaining the property so that it is not subject to waste. This means not committing acts that would permanently injure, devalue, or change the character of the property. The buyer is also responsible for major repairs, so that the property can be sold for at least as much as the purchase price.
The buyer is generally responsible for insurance, although the seller may require the buyer to purchase insurance naming the seller as an insured. In this case, the seller should arrange payment of the insurance premiums, as the buyer will not be familiar with this obligation. The buyer should at all times maintain liability insurance on the property in the amount customarily carried by others with respect to similar properties.
Any failure by the seller or buyer to comply with these legal requirements and obligations may give the other party the right to terminate the land contract and recover damages. In addition, any dispute between the parties must be addressed by the appropriate legal action, since, in general, the remedy of "specific performance" is not available under Wisconsin law for the sale of real property.
Advantages & Disadvantages of Land Contracts
As outlined above, there are many reasons that purchasing real estate through a land contract may be more desirable than using a traditional purchase and mortgage transaction. However, buyers and sellers should always be cautious in entering into a land contract. For the seller, the main concern should be the ability to collect the purchase price once the payment terms have been established and implemented. Foreclosure of land contracts in Wisconsin is often subject to complex legal issues that could stall or totally prevent the seller from recovering the unpaid balance. Some of these issues, as the author has seen, are caused by title companies refusing to provide title insurance policies on land contracts for reasons that bear little relationship to the law. With proper drafting and guidance before entering into a land contract, the seller can protect himself or herself from these risks.
Unlike a traditional mortgage, the holder of the land contract has no lien on the property. Subject to statutory redemption rights, the Seller continues to hold legal title to the property. Therefore, if the Buyer defaults on payments, the Seller must contract with a third party for legal services or undertake a foreclosure proceeding without the benefit of title insurance. This includes obtaining a Judgment of Foreclosure and Sale from the Circuit Court, and then conducting a Sheriff’s sale. Depending on how much has been paid under the land contract to date, the process can result in the Seller losing substantial sums of money if the property is worth less at the time of foreclosure than the Buyer owes. This scenario can be prevented by including a due on sale clause in the land contract, which will allow the Seller to foreclose a contract for a default for any non-payment of the desired monthly installments. However, under such a clause, the Seller would be required to give 30 days notice to the Buyer of Seller’s intent to accelerate the payments, and the Buyer would be allowed to cure the default within that time period. Therefore, such a due on sale clause merely allows the Seller to foreclose on the contract for non-payment of amounts due, and does not provide an immediate right to foreclose based on the sale of the property.
Another risk to the Seller is that a subsequent creditor of the Buyer could enforce his or her rights in the property and even evict the Seller from the property if the sale was never legally recorded. As stated above, a land contract itself is not recorded, but the deed from the Seller to the Buyer should be executed and recorded in the Register of Deeds’ Office, even if it contains language indicating that it is held in escrow until the Buyer pays the purchase price. Many title companies will insure over the successful defense of such claims, provided the deed has been recorded and the policy is written appropriately. The downside to recording the deed is that, if the Seller retains possession of the property, the Seller will also remain responsible for property taxes, which can result in them becoming the Superior Lienholder. In comparison, if the land contract is recorded, the land contract will place a lien against the property that will be superior to all thereafter recorded documents, except those with priority, as will be discussed below.
Existing mortgages can also create problems for both the Buyer and Seller. Because the Buyer is purchasing the property "subj to" (subject to) the prior mortgage, the Buyer will take the property subject to the lender’s rights. As a result, the lender’s loss mitigation options may be available to the Buyer, but the Buyer will also be responsible to the lender for any deficiencies on the underlying mortgage loan. There is no case law in Wisconsin explaining the exact rights of a buyer to enforce lender loss mitigation rights, but the current legal consensus is that a buyer’s rights will depend on whether the terms of the mortgage grant would allow the buyer to step into the prior owner’s shoes. While the above situations may seem obvious, where they become problematic is when a borrower is not forthcoming about the amount owed on the underlying loan and the state of the loan’s performance. If the Seller accepts the Borrower’s misrepresentation of the state of the existing loan, then the Seller will bear the practical risk of first defending an eviction action by the lender, and then of being barred from recouping the purchase price from the Buyer once the borrower makes good on the loan’s delinquency.
Common Mistakes in Custom Wisconsin Land Contracts
The beauty of a Wisconsin Land Contract is the ability of both Buyer and Seller to negotiate their terms and conditions. However, this flexibility can often lead to issues if not approached properly. We routinely encounter a few common pitfalls when helping clients create or enter into land contracts:
In the end, a well thought out and crafted Wisconsin Land Contract can be a valuable tool to accomplish your real estate contract goals . Working with an experienced real estate attorney is a must though. An attorney you can sit and discuss the details of your sale, purchase or lease with. Often times it ends up saving you money and headache in the future.
Termination & Default
Termination and breach of contract may occur in a land contract transaction, except where the owner has filed a Lis Pendens pursuant to Wis. Stat. 842.40 or a foreclosure has already occurred. The global provisions of the seller that a buyer be current will prevail in a default situation. In the case of a default on the part of the buyer or purchaser, the seller may not evict the purchaser until a foreclosure of the land contract has occurred. The remedy of the seller is limited to recording a notice of default in the register of deeds office and then bringing an action to collect the balance due.
A notice of default is a "single written document" containing:
- (1) the names of the seller or sellers, the purchaser or purchasers and the land contract sales price;
- (2) a statement that the specific event or events of default listed therein have occurred for the reasons listed therein; and
- (3) the purchaser’s name, if known, and last known address.
The seller must also give the buyer or purchaser written notice of the default by certified mail with return receipt requested. The default must be cured on or before the due date of the next installment prior to the due date of the next installment following the notice of default.
The notice of default is signed by the seller and notarized, after which it is recorded in the register of deeds office. The following must be shown on the notice of default:
- (1) A physical address or other description of the premises sufficient to identify them;
- (2) the number of the attachment to the land contract, if any;
- (3) the date of the land contract; and
- (4) the name of the seller or sellers.
The notice of default must be mailed by certified mail, return receipt requested, to the buyer or purchaser at the address listed in the land contract.
How to Create a Land Contract in Wisconsin
The heart of the land contract is the lengthy purchase agreement that sets the terms of the purchase. The purchase agreement needs to be carefully drafted to assure compliance with Wisconsin law. For example, Wisconsin law requires that a land contract must have at least 5 years to amortize, at least 10 years to pay off, and carry a minimum interest of around 90% of the federal rate. If the purchase agreement does not comply with these formalities the contract may be treated as a mortgage. Mortgages are different from land contracts and may be much less favorable for the seller.
If the contract term is greater than 8 years it must also be witnessed by two competent witnesses. We often leave this step out for contracts of less than 8 years. However, for longer contracts we have the seller initial each page, sign the contract, then sign it again in front of two witnesses who also sign the contract. This step assures that important issues such as the term of the contract and the payment terms are clearly memorialized to minimize issues with enforcement down the road. The purchaser’s signature should be notarized to verify authenticity.
Prior to signing and recording the land contract, we recommend that someone qualified to draft a deed draft two deeds. The first deed should be drafted in favor of the seller. This will be the deed that will be executed on full payment of the contract. The deed should give the purchaser the right to possess the property during the term, and to enter into leases and record them with the county register of deeds. The deed should also have a clause stating that the seller has the right to cancel the contract, and shall provide the purchaser with the ability to cure any defaults. The contract should also state that upon seller’s notice of default, the purchaser shall vacate and deliver possession to seller by a date certain.
The second deed should be prepared in the event of the purchaser’s default. This deed can be recorded to put the world on notice that the purchaser’s right to possess the property has terminated. In the event of default the seller can execute the first contract and tender it for recordation which puts the world on notice that the property is owned by the seller.
Wis. Stat. § 706.06 provides an explicit process lending clarity to when and how a land contract is extinguished:
Contracts of conveyance, including contracts made for nominal consideration or where the parties do not intend delivery of the instrument to give a right in land, shall be valid for the purpose of raising or supporting a title, but shall, unless the parties stipulate otherwise, expire twenty years after signing or sixty days after notice to perform is given to the grantor and grantee under sections 893.35, 893.36 and 893.37 and the conditions to perform are not preformed, whichever occurs first. An extension of the time for performance may be secured in accordance with s. 706.11, except if the contract is extended more than once under this section the extension shall not be for a term which extends the original term or a total term of more than 20 years beyond the expiration date under this chapter. Unless otherwise stipulated, a contract of conveyance executed by a corporation, a limited liability company or an association organized under ch. 181 or 183 shall not expire pursuant to this subsection unless notice is given to the grantor and grantee in the same manner as required under ss. 893.35, 893.36 and 893.37. This subsection par. (1) does not affect the enforceability of the instrument as a contract or other agreement between the parties.
Without the right to notice and cure and the right to possession the remedies of a land contract seller who is holding the property as security are very limited and enforceability may be jeopardized. The remedy of an action for foreclosure might be available in an extreme case, but for most investors in a land contract situation an ejectment action is the remedy of choice. Women’s Club of Milwaukee v. Huebner, 8 Wis. 2d 365, 371, 99 N.W.2d 709 (1959).
If you need help drafting a Wisconsin Land Contract let us know.
Common Queries
Are there options for refinancing a Wisconsin land contract?
In cases where the land contract is recorded and title insurance is issued in the buyer’s name, financing options can include a conventional first mortgage, second mortgage, and home equity line of credit. If some or all of the seller’s mortgage payments have been made by the buyer, that may have positively changed the buyer’s credit rating and improved their chances of qualifying for a lower interest rate.
What happens to property taxes on the property in the case of a Wisconsin land contract?
Property taxes are uniformly assessed to the legal record owner of the property. Thus, if the land contract is not recorded, and the seller continues to be the legal owner of the property, the taxes will be assessed to the seller. The taxes will need to be paid by the seller in accordance with the terms of the contract.
The general tax rule in Wisconsin is one of "equitable assessment", which means the tax burden should be equitable among all properties. Since assessments are based on the fair market value of the property, and taxpayers have the right to challenge their assessment, you may want to consider assessment for those years when the property was owned by the seller to understand how much of your land contract payments are being used to pay property taxes, and whether the seller will be responsible them, e . g. via a credit at closing, if the seller had not been assessed during its ownership.
If the land contract is recorded, the tax bill may be assessed to the buyer, who has equitable title, or the seller, who has legal title. The name that appears on the tax bill is often dependent on local municipal practice – for instance, the City of Milwaukee often assesses the tax bill to the contract buyer (even when the person is not identified as the property owner) if the land contract is recorded at the time the tax bill is issued. The seller is often given a tax bill credit at the end of the year for taxes that were assessed against the buyer.
Does a Wisconsin land contract preclude future sale of a property?
No. Land contracts are often used to facilitate the purchase of property that is not eligible for traditional financing. However, where the seller maintains legal title to the property, the seller will not be able to sell the property to another buyer without satisfying the underlying debt secured by the original mortgage. In this case, it is generally best for the buyer and seller to negotiate a release of the seller from their underlying mortgage, or for the buyer to assume the existing mortgage.